UBS Credit Suisse ”Not a bailout” Deal: Follow the money, NOT their words

In the 2^nd major bank bailout (that apparently isn’t a bailout) in as many weeks, the Swiss National Bank (SNB) and other Central Banks around the globe are showing us their main focus is ‘stability’ narrative spinning as opposed to actually benefiting the long-term economic stability of their respective nations.

It was announced over the weekend that UBS had officially acquired Credit Suisse for approximately CHF3 billion (francs), representing CHF0.76 per share, an 89% loss for Credit Suisse shareholders compared to their equity values this time last year.

Senior tier as well as tier 2 bondholders did not suffer any losses, with depositors also being 100% covered.

As a part of the deal, The Swiss central bank is allowing UBS to obtain up to 100 billion francs in liquidity assistance loans, as well as promising a loss guarantee of up to 9 billion Swiss francs (after UBS covers the first 5 billion).

In other words, more government money will be going towards banks that failed as a result of their own actions.

As we discussed on insights last week, the ramifications of major banks continuing to not suffer the consequences of their own reckless endeavors will only lead to an increase in high-risk yield chasing investment activity, which is obviously the antithesis to much needed banking and financial stability in the current economic environment. 

Of course, The European Central Bank (ECB) attempted to calm fears during the week.

“In any case, our policy toolkit is fully equipped to provide liquidity support to the euro financial system if needed and to reserve the smooth transmission of monetary policy.”

“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss Economy in this exceptional situation,”

As we have grown to expect, Switzerland’s Finance Minister, Karin Keller-Sutter, had to come out and assure people that this deal was anything but a bailout.

“This is no bailout. This is a commercial solution.”

Of course, many well educated economists and analysts disagree, including El-Erian, chief economic advisor to Allianz and president of Queen’s College at Cambridge University.

“The phrase ‘bailout’ has become such an awful phrase that everyone is avoiding it. They’re going out of their way to say it’s not a bailout, but they can’t explain why money’s has been put to work.”

At the end of the day, we again have a case where government taxpayer money is being ushered to rescue a major bank from a problem, they themselves created.

And rather than trying to fix the systematic issue, Governments and central Banks continue to put band-aids over it and place all their time and energy into public relations.

And what is being completely missed by most observers, is that this ‘liquidity crisis’ is in fact seeing enormous amounts of liquidity flooding the system via the back door. Ultimately which door is used is irrelevant. Money does and always will find its way through.  All this liquidity via the Fed, US treasury, their Swiss and Euro equivalents, combined with the enormous monetary injections from the Chinese and Japan mean easy money is back even if talk remains of ‘will they hike or not’.  That is hugely constructive for gold and silver.  The panic may be ‘over’ but the structural support for gold and silver may just be beginning. 

Put another way, all of this confusion over bailouts vs non bailouts, hikes vs no hikes, easing vs tightening is going to lead to further volatility but is it deliberate. The central banks need confusion to get all of this new liquidity into the system while avoiding direct oversight. But gold can see through it and that’s why we are near all time highs.

Follow their money, not their words.